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26 November 2008
EQIX, EQIX US
Overweight $40.93
We are initiating coverage of Equinix and Switch and Data, the two largest participants in the U.S. carrier-neutral data center market. As carrier-neutral providers, both companies provide the space, power, cooling, and security for customers of all types to house equipment and interconnect with business partners and bandwidth providers. Ecosystem attracts customers, limits alternatives. The availability of the worlds largest network providers creates an incentive for customers to choose carrier neutral facilities. As more companies enter the facility, their business partners are enticed to use the same facilities to reduce the costs and time of conducting business, essentially creating an ecosystem or network effect. Geography and size are primary differentiators. Within the U.S., Switch and Data and Equinix largely overlap in six major geographic areas. Switch and Data also operates facilities in 17 other markets while Equinix operates data centers internationally, including 5 in Asia-Pacific and 15 in Europe. Equinixs average facility size is nearly three times larger than that of Switch and Data, making it the premier provider for large network carriers to exchange Internet traffic. However, Switch and Data has had more success selling cross connects, and its revenue contribution from the high margin interconnection business is more than 2x that of Equinix. Attractive supply and demand characteristics. Demand for network neutral data center services is driven by the growing availability of broadband Internet services and Internet traffic usage; increasing power requirements, which lead to greater outsourcing; and more concentrated supply following industry consolidation. Pricing has risen in recent years and should continue to improve in the near term. Average revenue per cabinet is growing in the mid- to high single digit range, supported by price escalators, larger deal sizes, and increasing interconnection. Investing for growth. Building data centers is a capital-intensive activity, creating a barrier to entry. Both companies are currently investing heavily to expand existing facilities and build new ones where capacity may be limited. Capital intensity should peak in 2008, though it will likely remain elevated in the near term. Maintenance capital is relatively low (5%-10% of revenue), providing meaningful cash generation once major expansion is complete. Both stocks offer attractive entry points; stronger capital base favors Equinix. While we are attracted by the top-line growth and potential margin expansion of each, we favor shares of Equinix given the companys global presence, more attractive assets, and, importantly, its stronger capital base. We assign ratings of Overweight to Equinix and Neutral to Switch and Data, with December 2009 price targets of $54 and $6.50, respectively, based on discounted cash flow analysis.
Scott Goldman
(1-212) 622-2664 scott.goldman@jpmorgan.com
Manish Jain
(1-212) 622-8692 manish.x.jain@jpmchase.com J.P. Morgan Securities Inc.
Equinix, Inc. (EQIX;EQIX US) Company Data Price ($) Date Of Price 52-week Range ($) Mkt Cap ($ mn) Fiscal Year End Shares O/S (mn) Price Target ($) Price Target End Date 2007A 40.93 25 Nov 08 110.97 32.72 1,552.56 Dec 38 54.00 31 Dec 09 EPS ($) Q1 (Mar) Q2 (Jun) Q3 (Sep) Q4 (Dec) FY CY (0.04) 0.05 0.12 (0.21) (0.08) 2008E 0.15A 0.06A 0.22A 0.26A 0.68A 2009E 0.27 0.35 0.44 0.44 1.51 2010E
2.75
Company Data Price ($) 5.29 Date Of Price 25 Nov 08 52-week Range ($) 19.84 - 3.92 Mkt Cap ($ mn) 182.62 Fiscal Year End Dec Shares O/S (mn) 35 Price Target ($) 6.50 Price Target End Date 31 Dec 09
Switch and Data Facilities Company (SDXC;SDXC US) 2007A 2008E EPS ($) Q1 (Mar) (3.61) 0.05A Q2 (Jun) 0.08 0.06A Q3 (Sep) 0.06 0.02A Q4 (Dec) 0.09 0.04A FY 0.17 0.16A CY
Source: Company data, Reuters, J.P. Morgan estimates.
2010E
0.37
Table of Contents
Investment Thesis ....................................................................4
Equinix.........................................................................................................................4 Switch and Data ...........................................................................................................4
Industry Overview ....................................................................4 Key Industry Issues................................................................13 Valuation .................................................................................13 Equinix ....................................................................................15
Key Investment Points ...............................................................................................15 Investment Risks........................................................................................................15 Earnings and Cash Flow Outlook ..............................................................................21 Valuation and Rating Analysis ..................................................................................22 Management...............................................................................................................22 Risks to Our Rating....................................................................................................23 Company Models.......................................................................................................24
Investment Thesis
Equinix
We believe Equinix operates the premier carrier neutral data center assets. The companys scale and brand enable it to attract a strong client base, including the worlds largest bandwidth providers and many of the largest and fastest growing content providers and enterprises. We believe Equinixs strong balance sheet should enable it to grow faster than the overall colocation market as it invests for growth both domestically and internationally. In addition, we are attracted to the defensive nature of Equinixs recurring revenue business, which should help mitigate the impact of broader economic weakness. We assign an Overweight rating to shares of Equinix and expect the stock to outperform the broader sector.
Industry Overview
Initiating Coverage of Equinix and Switch and Data. We are initiating coverage of Equinix and Switch and Data, the two largest participants in the U.S. carrierneutral data center market. The two companies operate facilities that have been specifically designed to house network equipment (client-owned or leased) used by a variety of businesses, including content providers, Internet service providers, and network carriers, to maintain data vital to their operations and interconnect with one another. The facilities provide solid construction, access to single or multiple network providers, site monitoring, security, and redundant power and cooling, which many enterprises are unable to replicate in-house in a cost-effective manner. Carrier Neutral Is One of Three Data Center Flavors. Services provided by data center operators vary. While there is overlap between the different providers, there are three primary types of colocation centers: carrier neutral, network specific, and real estate investment trusts (REITs). Carrier neutral facilities, or carrier hotels, allow customers to locate their equipment in a facility which offers interconnection to multiple telecommunications service providers. As a result, customers can select the
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service provider that best meets their needs based on the range of services, network reliability, and budget requirements. Customers oftentimes benefit from the competitive pricing environment created by having multiple service providers in a single location. In addition to sharing power and cooling systems, customers also benefit from shared Internet backbone connectivity, reducing operating costs. examples: Equinix, Switch and Data, Terremark Network specific colocation centers refer to facilities that limit network access to a single service provider. These centers are operated by the service provider and typically appeal to customers looking for a more complete set of managed services not offered by carrier neutral facilities, such as web hosting. Customers may also choose a network specific data center due to its location or established relationship with the service provider. Traditional telecom companies seek to differentiate their services through the breadth of their product portfolio and networks, service reliability, and experience providing both managed and professional services. examples: AT&T, Cogent, Level 3, Qwest, Savvis, and Verizon Real estate investment trusts (REITs) have begun building facilities for enterprises looking to operate their own data center or to wholesale to other providers of data center services. examples: Digital Realty Trust and DuPont Fabros Technology
Table 1: Key Data Center Service Providers
Data Centers Carrier Neutral Equinix Switch and Data Terremark Network Operators AT&T Cincinnati Bell Cogent Level 3 Qwest SAVVIS Verizon Real Estate Investment Trusts Digital Realty Trust DuPont Fabros
Source: Company reports and J.P. Morgan estimates.
Geographic Affiliation US, Europe, Asia-Pacific US, Canada US, Europe, South America US, Europe, Asia-Pacific US US, Canada, Europe US, Europe US US, Europe, Asia US, UK, Asia US, Europe US
39 34 16 38 5 36 78E 13 29 17E 74 6
Inside a Data Center. Data centers, which can occupy a single room or an entire building, are strategically located in secure surroundings, with close proximity to both clients and network access. The design of the structure itself is carefully planned, with features such as air sampling/control mechanisms, advanced fire detection systems and high-powered diesel generators all incorporated into the building plans to provide a high level of security and stability. Within the facility itself, cabinets housing networking and computing equipment are arranged in rows, often secured to the ceiling and raised off the floor to help prevent against possible earthquake or flood-related damage. Within the floor-to-ceiling cabinets, network
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equipment such as switches, storage devices, and routers are stored, and enclosed behind a secured entrance. Though specifics arrangements may vary, clients are provided with physical access to their respective areas 24 hours a day, 7 days a week. Equinix and Switch and Data Utilize Similar Business Models. Each company operates carrier-neutral facilities, opting not to operate their own networks, but preferring to serve as a meeting place for customers of all types to house equipment and interconnect with business partners and bandwidth providers. Given the size of their facilities, each can house multiple customers, allowing them to better leverage their assets. Further, the availability of the worlds largest network providers creates an incentive for customers to choose carrier-neutral facilities. As more companies enter the facility, their business partners are enticed to use the same facilities to reduce costs and time of doing business, essentially creating an ecosystem or network effect. Each company derives a significant portion of revenue from recurring fees charged for colocation and interconnection services. Geography and Size Are Primary Differentiators. The primary differences between the two firms are the geographic focus and data center capacities. Within the U.S., Equinix is located in six major geographic areas, including Chicago, Dallas, Los Angeles, New York, San Francisco, and Washington D.C. Switch and Data largely overlaps in each of these markets and counts all within its top 10 as measured in square footage. However, Switch and Data also operates facilities in 17 additional markets, including a larger presence in Atlanta, Philadelphia, and Seattle, among others. Equinix operates data centers internationally, including 5 in Asia-Pacific and 15 in Europe, with the majority of the latter coming from two recent acquisitions. Conversely, Switch and Data only operates one facility outside the U.S., located in Toronto. Facility sizes are also an area of differentiation. At year end 2007, the average Switch and Data facility was roughly 27,000 square feet, whereas we estimate the average Equinix facility was nearly 3x as large, or 79,000 square feet, with many facilities easily surpassing 100,000 square feet. Given the differences, it is logical to conclude that Switch and Data would cater to smaller, more geographically diverse customers while Equinix may be better at serving the needs of customers seeking a lot of capacity. However, given that the majority of Internet traffic is likely confined to a handful of markets, we do not believe this to be the case. Equinixs size affords it the ability to opportunistically pursue anchor tenants, and the company is willing to sell up to 15% of its capacity in a data center to a single tenant.
Source: Company reports and J.P. Morgan estimates. (1) Excludes Europe. (2) Of average billed cabinets. (3) Consolidated recurring revenue divided by weighted average billable cabinets (simple average for SDXC).
Colocation Is Primary Service. Colocation services account for the majority of revenue at carrier-neutral facilities. Providers offer the promise of a secure and reliable facility where customers can locate IT equipment necessary to conduct business. Colocation typically entails securing space, which can range from a single rack unit (commonly referred to as 1U) in a shared equipment cabinet to private customized cages capable of housing many cabinets. Customers are charged an installation fee as well as a monthly recurring fee for the desired amount of space. Recurring charges can range from just a few hundred dollars for a single rack to multiple thousands for cages and multiple cabinets. Customer equipment housed in the data centers is typically the clients responsibility, though some data center providers also resell servers, routers, and other IT equipment. Data center capacity is obtained in conjunction with either AC or DC power, with various amperages and phases availability to meet a wide variety of customer needs. Like the capacity itself, power incurs an installation fee and monthly recurring charge based on power requirements. Typical contracts vary from one to three years. Discounts are generally not available for longer-term contracts; in fact, customers typically pay more for a longer-term contract since they lock-in pricing for a longer period of time. In 3Q08, colocation accounted for 77% and 63% of revenue at Equinix and Switch and Data, respectively. Colocation Market Is Growing Double Digits. Sizing the colocation market can be challenging given that third-party forecasts can vary widely as definitions of colocation can differ. In addition, many operators do not break out colocation revenue separately, but include it in broader revenue buckets. As a result, a bottom-up approach to market sizing can be difficult. In addition, in its most recent forecast, market research firm IDC forecast a five-year compounded growth rate of 10.1% with U.S. colocation revenue expected to reach $1.1B in 2012. Notably, the forecast represents an acceleration from the firms prior forecast, which called for 6.9% growth on a five-year compounded basis. Though attractive, we believe Equinix and Switch and Data can grow meaningfully faster than the IDC forecast as carrier neutral providers should gain market share as more enterprises outsource space, power, and cooling needs. We currently forecast approximately 19% growth at Switch and Data over the same time period.
Interconnection Services Offer Attractive Margins. Interconnection services offer an attractive opportunity for data center providers to leverage the needs of their large customer base. The services enable customers and network providers to interconnect with one another on a one-to-one basis or to peer on a one-to-many basis. For example, a content provider will connect directly with Internet service providers for upstream capacity to the Internet. Alternatively, two companies may interconnect to directly exchange traffic. Large backbone service providers have come to use these facilities to exchange large amounts of Internet traffic by peering with other providers; these services were once reserved for a limited number of network access points (NAP). Connections are offered via CAT5, coaxial cable, or fiber, and carry an installation fee as well as a monthly recurring charge. Most contracts are on a month-to-month contract, though use of the cross connect tends to be more longterm. Customers can typically change connections with a 30 day notice. Outside of the cabling and connectors, interconnection services require little costs, providing a high margin opportunity for the data center providers. Not all facilities may offer interconnection services as they are typically attractive based on the number and type of customers housed within a facility. Non-Recurring Managed Services Round Out Revenue Base. In addition to providing standard colocation services such as floor space, power, network connectivity, and security, Equinix and Switch and Data also provide a low level of managed or professional services. The offerings primarily include installations, for which a one-time fee is received per rack, cabinet or foot of cage space for colocation, per circuit or port for interconnection, and per amp for power. In general, installation fees will vary depending on the size and complexity of the job. Both companies also offer technical support services which offer trained support staff to meet various customer needs, such as equipment testing and rebooting, among others. These services are priced per hour and are available as needed or by contract. Non-recurring revenue can fluctuate in any given quarter, but historically account for 4%-5% of total revenue on average. Who Utilizes Data Centers? Data center clients typically fall into three buckets: network providers, content providers, and enterprise customers. Network service providers co-locate in carrier neutral facilities in order to provide direct network connectivity to both content and enterprise customers. For these services, network providers typically compete with many other providers, all vying to provide bandwidth to end-user businesses. This creates a very competitive environment which provides enterprises and content providers a broad choice of providers, services, and pricing, adding to the appeal of carrier-neutral facilities. In addition, carrier-neutral facilities have also developed into the de facto standard for network providers to exchange, or peer, traffic with each other. The network providers previously relied upon a limited number of carrier-operated interconnection facilities known as network access points for this service, however these facilities are largely obsolete today. Enterprise and content providers not only use the facilities to locate equipment in a secure and reliable location, but to connect with other enterprises as well as their desired network provider.
Content Providers Akamai eBay Electronic Arts Google Limelight Networks Microsoft MSN MySpace Netflix Yahoo YouTube
Enterprise Amazon.com Capgemini DirecTV FactSet Gap GlaxoSmithKline NASA Nokia Salesforce.com Syniverse Verisign
Benefits of Outsourcing Data Center Needs. Growth in user traffic as well as the increased complexity of network-based services has placed an increased demand on the network infrastructure of both content providers and enterprise customers. As a result, businesses must decide how and where to invest to manage this growth. Understanding that network management is generally not an area of competitive strength, content providers and enterprise customers are increasingly outsourcing these services. Key benefits of outsourcing include: Cost Savings. By providing a centralized facility for multiple tenants, data centers provide clients an opportunity to leverage the varied costs associated with maintaining such a facility, such as power, cooling, and Internet connectivity. In addition, colocation centers can provide clients with flexible access to resources that address common IT functions which would likely be uneconomical or underutilized at an in-house facility. Risk Management. A primary benefit of outsourced colocation is the ability to mitigate the risk associated with an in-house data center. In addition to being able to physically de-centralize network operations (particularly beneficial in the event that a home office or headquarters is located in a region susceptible to natural disasters), colocation facilities are designed to provide a stable and reliable environment for key network elements. Along with 24-hour security surveillance, data centers are equipped with environmental controls such as early-detection water leak and fire suppression systems, redundant power supplies (battery and generator support), and sophisticated humidity and cooling systems, all contributing to a stable and reliable setting for network equipment. Maintenance and Support. For situations in which a client utilizes a colocation facility that is geographically removed from central offices, physical access for maintenance and resolution purposes can be problematic. However, colocation facilities are staffed with IT personnel to provide around-the-clock technical support and maintenance. Although particular services vary by operator, common offerings include circuit testing, memory tape swapping, equipment rebooting, power-cycling, and emergency equipment replacement. Connectivity. Depending on whether a colocation facility is network specific or carrier neutral, a clients connectivity options will vary. Generally, clients are provided with fully scalable, redundant bandwidth supporting connections from T1 through OCx levels. Additionally, clients are able to interconnect directly with other companies while service providers commonly use data center to interexchange traffic.
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Broadband and Power Are Primary Demand Drivers. Demand for network neutral data center services is driven by a number of industry factors, including the growing availability of broadband Internet services and Internet traffic usage; increasing power requirements, which lead to greater outsourcing; and more concentrated supply following industry consolidation. Broadband growth. Growth in Internet traffic and broadband availability has been an important driver of data center demand as these facilities serve as an essential means for content providers to hand-off traffic to bandwidth providers and business partners. In addition, maturing business models such as social networking sites, high-definition video, and the migration of video content from broadcasters to the Internet are also driving bandwidth consumption. We estimate consumer broadband penetration to be ~60% and believe this figure could approach 70% in 2010. Similarly, IDC forecasts consumer Internet-generated traffic to grow 23% on a compounded basis from 2006 to 2010. As a result, we continue to expect subscriber and traffic growth to drive near- to mid-term demand for data centers. Power requirements. Improvements in technology have dramatically reduced the footprint required to process and exchange data, but at the expense of greater energy consumption. The Uptime Institute recently noted that some companies have experienced a 40% increase in power consumption in just the last five years, while the top third of the institutes 100+ members experienced a 25% annualized increase. Pre-established and company-operated data centers are not necessarily equipped to handle the greater power requirements and are not prepared to allocate the necessary capital to expanding power capacity. As a result, companies are turning to data center providers, including the carrier neutral players, to access state-of-the-art facilities that will enable them to grow into their business models. Consolidation benefiting supply. Since the dot.com crash in the early 2000s, we have witnessed a considerable amount of consolidation within the data center industry. The consolidation helped narrow the supply of colocation space, particularly given that both Equinix and Switch and Data were active consolidators of available assets. Consolidation was driven by oversupply caused by aggressive buildouts coinciding with the proliferation and promise of thousands of dot.com start-ups. As the bubble burst, some companies were forced to sell or simply went bankrupt, while others exited the business in order to focus on core strengths. Given the current credit and economic environment, we believe further consolidation is likely, with both Equinix and Switch and Data positioned to take advantage of distressed assets should they become available.
Table 4: Data Center Consolidation
Date January 2005 December 2004 May 2004 March 2004 January 2004 January 2004 October 2003 March 2003 December 2002 September 2001 Acquirer Switch and Data Equinix Telx Switch and Data Switch and Data SAVVIS Equinix Switch and Data Equinix Navisite Target LayerOne Abovenet (only San Jose) 56 Marietta RACO Meridian Telesis Cable & Wireless (NA assets) Sprint (only Santa Clara) PAIX Merger with STT and Pihana Colo.com Locations Chicago, Dallas, Miami San Jose Atlanta Buffalo, Chicago, New York, Toronto Philadelphia 15 data centers Santa Clara Atlanta, Dallas, New York, Palo Alto, Seattle, Vienna (VA) Los Angeles, Singapore, Tokyo, Seoul, Sydney, Hong Kong, Honolulu and others Chicago, Dallas, Las Vegas, Los Angeles, Milwaukee, New York, Oak Brook (IL), San Francisco, Santa Clara, Vienna (VA)
Measuring the Carrier Neutral Providers. Net usable capacity and the corresponding number of sellable and billable cabinets are the key drivers of the carrier-neutral business model. The more space available for customers to locate equipment, the greater the opportunity to generate revenue and maximize return on investment. Reported utilization levels provide insight into how well each company is able to fill capacity in its data centers. Utilization rates will vary from quarter to quarter as new capacity is brought online. We expect this measure to remain volatile while both Equinix and Switch and Data continue to build new data centers, though once expansion is completed, we believe utilization rates of 80%-90% can be expected. As with any recurring revenue model driven by customer contracts, investors also pay close attention to pricing trends, as measured by changes in the average revenue per billed cabinet, as well as cabinet churn, a monthly measure of the rate of cabinets disconnected (i.e. billed cabinets removed from service due to non-renewal, non-payment, or other reasons). Lack of Supply Benefiting Pricing. Pricing for data centers and hosting services has risen in recent years, driven by a number of factors. First, the supply of data centers rationalized following the dot-com bubble as growth forecasts failed to live up to expectations; second, demand for outsourced solutions is strong driven by business continuity solutions, disaster recovery and backup needs as well as Sarbanes-Oxley requirements, and; third, improved server technology has reduced square footage requirements at the expense of greater power and cooling needs which extend beyond in-house capabilities. Today, these trends remain favorable for the carrier-neutral players, as evidenced by mid to high single-digit revenue growth per cabinet. Long-term contracts with the providers can carry price escalators of 3%-5% while average deal sizes increase amid higher volumes. Despite new capacity planned by a number of providers, we expect pricing trends to remain stable for the carrier neutral players given very strong booking trends and high utilization rates. Given the rising power requirements of todays servers and the elevated cost of power, market research firm Gartner expects power to become the primary price determinant going forward, not square footage. Build Costs Serve as Barrier to Entry. Building a data center can be a cost intensive endeavor, from procuring the real estate to building the infrastructure with adequate power and cooling to satisfy customer needs. In a 2007 presentation, Equinix indicated that costs to build a data center ranged from $600 to $1,500 per square foot, implying a 100,000 square foot facility could range from $60M to $150M. Once constructed, on-going maintenance capital can run 5%-10% of revenue. We believe this capital intensity, combined with the strong network of established clients, serves as a barrier to entry for potential service providers looking to replicate Equinix or Switch and Datas business model.
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100 $1,000 $100,000 $50 2,000 5.0% 2008 2009 55% 1,100 1,800 $23,760 $9,504 40% 2010 75% 1,500 1,854 3.0% $33,372 $15,271 46% 60% $0 1,669 1,669 $13,603 2011 85% 1,700 1,910 3.0% $38,956 $18,622 48% 60% $0 1,948 1,948 $16,674 2012 90% 1,800 1,967 3.0% $42,485 $20,739 49% 60% $0 2,124 2,124 $18,615 2013 90% 1,800 2,026 3.0% $43,760 $21,504 49% 60% $0 2,188 2,188 $19,316 2014 90% 1,800 2,087 3.0% $45,073 $22,292 49% 60% $0 2,254 2,254 $20,038 2015 90% 1,800 2,149 3.0% $46,425 $23,103 50% 60% $0 2,321 2,321 $20,782 2016 90% 1,800 2,214 3.0% $47,817 $23,938 50% 60% $0 2,391 2,391 $21,548 2017 90% 1,800 2,280 3.0% $49,252 $24,799 50% 60% $0 2,463 2,463 $22,337 2018 90% 1,800 2,349 3.0% $50,730 $25,686 51% 60% $0 2,536 2,536 $23,149
8.7%
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Valuation
We believe that Equinix and Switch and Data are both attractively positioned within the data center provider industry to grow market share given the carrier neutral model. We anticipate both companies will continue to attract top-notch clients looking to leverage the large network, or ecosystem, created by both companies, while continuing to support the IP-driven growth of the existing customer base. While we are attracted by the top-line growth and potential margin expansion of each, we favor shares of Equinix given the companys global presence, more attractive assets (favored by carriers for majority of peering), and stronger capital base. We employ a discounted cash flow analysis to value each company. For Equinix, our December 2009 price objective of $54 is derived based on a DCF analysis which employs a 10.0% WACC and a 6.0x terminal EBITDA multiple, justified, in our view, given the companys relatively attractive growth and access to liquidity to support its future growth strategy. Our December 2009 price target for Switch and Data is $6.50. Our target is based on a DCF analysis which assumes a 14.1% WACC and a 4.0x terminal EBITDA multiple, which we believe is justified given the companys relatively attractive growth, but high level of capital intensity and limited float.
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We recognize investors may prefer to use an EV/EBITDA multiple, however, we believe such multiples do not properly capture the capital intensity of the business, particularly during this heavy investment phase. We estimate capital intensity at Equinix will approach 65% and 43% in 2008 and 2009, respectively, compared with approximately 96% and 31% for Switch and Data.
Table 6: Valuation Comparison
$ in millions, except per share data Rating OW N Not rated Not rated Not rated 11/24/08 Price $40.69 5.30 3.23 2.40 25.37 EBITDA 2009E 370 72 82 121 348 52-week Range $33-$111 $4-$20 $3-$8 $2-$21 $18-$51 S/O (M) 38 35 59 35 73 Market Cap 1,543 183 191 85 1,861 Net Debt 899 128 284 498 1,242 Net Debt / 2008E EBITDA 3.1x 2.3x 4.9x 4.8x 4.3x EV/EBITDA 2009E 6.6x 4.3x 3.8x 2.6x 0.9x Net Debt / Capital 37% 41% 60% 85% 40% EV 2,442 311 476 583 3,102
EBITDA growth 09/08E 10/09E 28.4% 24.9% 29.9% 13.7% 41.4% N/A 15.9% 19.6% 19.8% 16.0%
Source: Company reports and J.P. Morgan estimates for Equinix and Switch and Data; FactSet and First Call consensus estimates for all others.
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Equinix
Key Investment Points Equinix (EQIX)
Overweight
Recurring revenue model. Approximately 95% of Equinixs revenue is recurring, generated from customers opting for 2-3 year contracts. Switching data center providers is costly and challenging, requiring the purchase of new equipment and redundant networks until a seamless migration can be achieved. Given these potential high barriers to entry, it is not surprising that monthly revenue churn at Equinix is only ~2%. Operating leverage. Equinix operates a predominantly fixed cost structure driven by labor and rent costs tied to its facilities. Combined, these expenses accounted for nearly half of the companys cash costs in 2Q08. Though power may be viewed as a volatile variable cost, a large percentage of contracts allow for rising power costs to be passed on to customers, though this clause is not often invoked. Management believes its business model is supportive of a 500 bps to 1,000 bps margin increase from the current 40% level, implying 60%+ incremental margins. Low maintenance capital requirements. Equinix is currently investing in growth, with plans to spend $450M-$460M in 2008, or roughly 68% of its recurring revenue. However, on-going capital requirements are much lower and run below broader industry averages. Management anticipates spending approximately $60M in ongoing capital in 2008, roughly 8.5% of our estimated total revenue. In the longterm, maintenance capital spending is expected to be approximately 5% of revenue. With 45%-50% EBITDA margins and relatively low capital requirements, we expect Equinix to generate meaningful cash flow once aggressive growth plans are completed. Fully funded for growth. We believe Equinix has ample liquidity to pursue its expansion plans while providing flexibility to be more aggressive should market conditions warrant acceleration. Equinix had an unrestricted cash balance of $330M in 3Q08 and the company anticipates drawing on $41M of funds from Asia-Pacific and European financing. Though free cash flow remains elusive, we expect Equinix to exit 2009 with a healthy cash balance even after adjusting for an anticipated $50M debt pay down. In addition, the company has built a $50M cushion into its expansion capital budget, providing flexibility to cutback on discretionary spending, though we do not anticipate Equinix to do so given current fundamentals.
Investment Risks
Economy. Equinix is levered to the overall enterprise market. In the current economic environment, we have seen a lengthening of sales cycle and delays in decision making. Softer demand trends could pose a challenge as Equinix invests heavily in expanding its available capacity; lower than anticipated utilization rates could hamper Equinixs revenue growth profile. Competition. Though Equinix is one of a few major players in the carrier neutral colocation market, there is no shortage of service providers investing in data centers. Network providers such as AT&T, Cogent, Savvis, and Verizon are all investing in
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new data center capacity and leveraging their network capabilities and managed/professional services offerings to compete for customers. Increased supply could pressure pricing for Equinix services, which has been a driver of growth in recent quarters. Integration Risk. Equinix recently completed two transactions which provide an entre into the European market. While lower margins in the European operations currently provide an opportunity for Equinix, the company must adapt to a different market environment and may not be able to realize planned operating efficiencies. In addition, the interconnection service is a much lower portion of revenue in Europe and Equinix may not be able to achieve expected revenue synergies.
Company Description
Equinix provides colocation and interconnection services to content providers, Internet service providers, enterprises, and network carriers. Through its 39 data center facilities (known as Internet Business Exchanges, or IBXs), Equinix provides colocation services, including cabinets, power, and storage space. Equinixs interconnections services enable its customers to connect directly with one another, either on a one-to-one basis or through a peering service. Equinix traditionally offered service in the U.S. and Asia-Pacific regions and recently expanded into Europe through its acquisitions of IXEurope and Virtu Secure Webservices. The company generated $419 million in revenue in 2007, with the colocation business accounting for approximately 73% of revenue, the interconnection portion approximately 18%, with the balance coming from installation and other nonrecurring revenue. Equinix was founded in 1998 and is headquartered in Foster City, California. Its stock trades on the Nasdaq under the ticker EQIX. Hub Strategy Supports Global Presence. Equinix operates 39 data centers located throughout the world, including 19 in the U.S., 5 in the Asia-Pacific region, and 15 acquired through European acquisitions. Combined, the data centers offer roughly 1.8M of net square footage, which measures the sellable space of the footprint. Cumulative gross square footage is up nearly two-fold since year end 2006 as the company has expanded existing data centers and grown through acquisition and greenfield builds. Equinixs strategy focuses on serving as an Internet hub, providing customers access to connect to the worlds largest bandwidth providers, including all tier 1 Internet service providers. By offering such access, Equinix is able to attract an impressive client base, including the most recognized names in content, large enterprise companies, and government entities. The approach lends itself to greater utilization as the large network entices additional companies to colocate in Equinix centers in order to be closer to business partners and network providers.
Table 7: Equinix Data Center Locations
North America Chicago Dallas Los Angeles New York Silicon Valley Washington, DC 3 1 4 4 4 5 Europe Dsseldorf Frankfurt Geneva London Munich Paris The Netherlands Zurich 1 2 1 4 2 2 1 3 Asia-Pacific Hong Kong Singapore Sydney Tokyo 1 1 2 2
Source: Company reports. Note: includes non-IBX locations and planned facility openings. 16
Acquisitions Fuel Growth and Entry into Europe. Prior to 2007, Equinix offered its services only in select markets in the U.S. and Asia-Pacific. In September 2007, the company completed its acquisition of IXEurope, an operator of 14 data centers with more than 450 customers, for $555M plus the assumption of debt. IXEurope supported facilities in major markets, including Dusseldorf, Frankfurt, Geneva, London, Munich, Paris, and Zurich. In February 2008, Equinix followed the acquisition by acquiring Virtu Secure Webservices, a Netherlands-based data center provider. Virtu operated two data centers (Enschede and Zwolle) and was in the process of building a third, in Amsterdam. The two acquisitions gave Equinix an immediate entry into the European marketplace where it hopes to leverage the global reach of its customers. Though a more competitive market, European demand tends to outpace supply by a near six to one margin, per third party reports. Expansion Strategy. Equinix continues on an ambitious four-year expansion strategy which is expected to yield an additional 14,400 sellable cabinets in the U.S. and Asia-Pacific as well as 9,460 cabinet equivalents in Europe (note: the European market does not employ similar metrics to the U.S. and Asian markets). The plans are expected to cost roughly $1.0B-$1.1B between 2007 and 2010. In 2008, Equinix plans to spend $390M-$400M on expansion activity, with 54% allocated to the U.S. markets, 25% to Europe, and the final 21% to Asia-Pacific.
Table 8: North American Data Center Expansion Plans
$ in millions Data Center Washington DC 4 Chicago 3 phase I New York 4 phase I Silicon Valley 2 phase II Washington DC 5 Los Angeles 4 Target Open Opened 1Q07 Opened 4Q07 Opened 4Q07 Opened 2Q08 Opened 2Q08 2Q09 Sellable cabinets 1,700 2,500 1,700 1,100 1,650 800 Total Capex $60 $175 $95 $41 $78 $90-$95 Comments additional capacity for 1,300 sellable cabinets in additional phase additional capacity for 1,250 cabinets, including 1,100 in phase II already announced expansion within existing SV2, which opened in Dec. 2003 phase I mechanical and electrical infrastructure will be built to support 1,700 cabinets; 800 will be available 2Q09, 900 will be shifted to future phases, along with the additional 1,300 sellable cabinets previously announced 300 cabinets available 1Q09 and remaining 800 cabinets available 2Q09 capex invested from 2006-2009
2Q09
1,100 10,550
$80-$90 $619-$634
17
Target Open Opened 3Q07 & 1Q08 Opened 3Q07 & 2Q08 Opened 3Q08 Opened 4Q08 4Q08 3Q09
Comments phased opening; Expansions within already existing SG1 phased opening expansion of existing SG1, includes incremental power for phase I & II additional capacity for 1,000 cabinets in future phases capex invested from 2007-2009
Target Open Opened 1Q08 Opened 1Q08 Opened 1Q08 Opened 2Q08 Opened 2Q08 Opened 3Q08 Opened 3Q08 2Q09 1Q10
Sellable cabinets equivalents 600 640 600 900 1,600 1,100 1,320 1,300 1,400 9,460
Total Capex $9 $10 N/A $17 $36 $31 $39 $30-$35 $80-$90 $252-$267
Comments 220 cabinets available 1Q08 and incremental 420 cabinets available 2Q08 acquired via purchase of Virtu in February 2008 Adjusted from 1,000 to 900 to reflect design changes Adjusted from 2,000 to 1,600 to reflect design changes 500 cabinets available 3Q09; remaining 600 available 1Q09 phased opening through 1Q09 additional capacity for 1,300 cabinets in future phases additional capacity for 4,100-4,600 cabinets in future phases capex invested from 2007-2010
Revenue diversification. As of 3Q08, Equinix received 62% of its revenue from its U.S.-based facilities while Europe and Asia-Pacific accounted for 26% and 21% of revenue, respectively. The contributions are largely in-line with the availability of colocation space by region. When parsed by customer type, enterprise and government accounted for 57% of monthly recurring revenue in 3Q08, including 16% from financial services firms, a likely byproduct of the companys Financial eXchange service. The service offers direct connectivity between firms and exchanges to reduce the latency (i.e. speed) of timely financial transactions. Of the remaining 43% of revenue, 26% is driven from network providers with the final 17% coming from content providers.
18
Non-Recurring 6%
Source: Company reports. Note: percentages are of monthly recurring revenue as of 3Q08.
ARPU discussion and trends. Pricing trends remain favorable in each of Equinixs markets. Excluding Europe, the companys average recurring revenue per weighted average cabinet continues to rise in the mid single-digit range on a compounded basis, rising from just under $1,413 in 1Q06 to $1,654 in the current quarter. The rise has been driven by accelerating booking volumes, larger deal sizes, and increased penetration of interconnect services. Given the relatively high margins of the interconnection business, Equinix has made a concerted effort to target customers with greater interconnect needs and is currently allocated portions of its data centers specifically for these customers. Equinix targets revenue of $1,800-$2,200 per month for its higher powered cabinets, though reaching the higher power requirements is not immediate, but is slowly increased over time.
19
US & Asia-Pacific
y /y change
Strengthening Dollar Poses Foreign Exchange Risk. Approximately 65% of Equinixs revenue in 3Q08 was U.S. dollar denominated, with an additional 13% and 10% coming from the euro and pound sterling, respectively. With more than one-third of its revenue coming from outside the U.S., the company is exposed to currency risk and the recent volatility in foreign exchange rates. Since August 1, 2008, the dollar has strengthened considerably against both the euro and the pound and the company noted that revenue in the quarter was impacted by $2.5M as a result. In addition, 2009 revenue guidance assumes approximately $50M of currency pressure experienced since July. Notably, management guidance issued on October 22 assumes $1.28 per euro and $1.63 per pound; however, the dollar has continued to strengthen against both currencies, more so against the pound, potentially placing further pressure on nearly a quarter of the companys revenue stream.
Figure 6: Historical Exchange Rates
0.8500 0.8000 0.7500 0.7000 0.6500 0.6000 0.5500 0.5000 0.4500 0.4000 1/1/2008 2/1/2008 3/1/2008 4/1/2008 5/1/2008 6/1/2008 7/1/2008 8/1/2008 9/1/2008 10/1/2008 11/1/2008 guided pounds/dollar rate guided euro/dollar rate
Euro/Dollar
Source: FactSet and company reports.
Pounds/Dollar
20
Fully Funded with Additional Flexibility to Trim Spending. We believe Equinix is fully funded for its announced expansion plans, a positive given the tight credit market, challenging economic environment, and 2.8x net leverage at the firm. We anticipate ample liquidity even after accounting for an anticipated $50M debt/capital lease payments in 2009 and 2010 and currently forecast a cash cushion of more than $70M exiting 2009, excluding long-term investments. In addition, given the relatively low ongoing capital spending requirements, the company has significant flexibility in its capital budget to cutback on discretionary spending. Within its planned $265M-$315M of expansion spend, management is including $50M for capacity increases in existing markets with additional flexibility to moderate spending should economic conditions warrant such action.
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Management
Table 12: Equinix Management Team
Key Executives Stephen M. Smith Peter F. Van Camp Keith D. Taylor Marjorie Backaus Sushil K. Kapoor Peter T. Ferris Eric Schwartz
Source: Company data.
Age 50 51 45 46 60 49 40
Position at Equinix CEO, President, Director Executive Chairman CFO Chief Business Officer Chief Operations Officer President of Equinix US President of Equinix Europe
Previous Experience HP, Lucent Technologies, EDS Frontier GlobalCenter, Genuity, MFS Internet Services International Wireless Communications, Inc, Becton Dickinson & Company Global One ,AT&T UUNET, Compuserve Network Services Frontier Global Center, Genuity Inc, MFS DataNet Inc BellSouth, Harold A. Dawson, McKinsey & Co.,
Stephen M. Smith, CEO, President, Director Stephen M. Smith has been Chief Executive Officer of Equinix since April 2007. Prior to joining Equinix, Smith was at Hewlett Packard where he served as Senior Vice President of HP Services, managing organizations such as Consulting and Integration, Managed Services and Technology Deployment and Support. Smith also had an eight-year career in the U.S. Army, which included a role as aide-de-camp to the office of the commander in chief of the U.S. Armed Forces in the Pacific. Smith graduated from the U.S. Military Academy at West Point and holds a Bachelor of Science degree in engineering. Peter F. Van Camp, Executive Chairman Peter F. Van Camp has been Executive Chairman of Equinix since March 2007 and served as Chief Executive Officer since May 2000 and President since March 2006. Previously, Van Camp served as Chairman of the Board of Equinix., from June 2001 to December 2002. He has been a Director of Equinix since May 2000. He has also been a Director of Packeteer Inc., since May 2001. Van Camp holds a B.S. in Accounting with a concentration in Computer Science from Boston College. Keith D. Taylor, CFO Keith D. Taylor has been the Chief Financial Officer of Equinix since September 2005 and also serves as its Principal Accounting Officer. Mr. Taylor served as Vice President of Finance and Chief Accounting Officer of Equinix from February 2001 to September 2005. Mr. Taylor holds a B.B.A from Bishops University in Quebec, Canada and is a Member of the Canadian Institute of Chartered Accountants.
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Marjorie Backaus, Chief Business Officer Margie Backaus joined Equinix in 1999 and has worked in the telecom industry for more than 20 years. Prior to joining Equinix, Backaus was Global One's Chief Marketing Officer, responsible for strategy and execution of Global One products, worldwide. Prior to that role, Backaus was at AT&T for nine years, holding various roles in marketing and product management, operations and regulatory affairs. Sushil Kapoor, Chief Operations Officer Sushil Kapoor has been Chief Operating Officer of Equinix since January 2008. In his prior role, Kapoor served as Vice President of Operations of Equinix from March 2001 to December 2006. Before joining Equinix, Mr. Kapoor served as Vice President of hosting operations at UUNET, the Internet division of MCI from November 1999 to February 2001. Peter T. Ferris, President of Equinix US Peter Ferris has been serving as Equinixs Vice President of US sales since July 1999. During the period from June 1997 to July 1999, Ferris was Vice President of sales for Frontier GlobalCenter. From June 1996 to June 1997, Mr. Ferris served as Vice President of Eastern Sales at Genuity. From December 1993 to June 1996, Mr. Ferris was Vice President of Mid-Atlantic sales at MFS DataNet Inc. Eric Schwartz, President of Equinix Europe Eric Schwartz has been President of Equinix's Europe business since June 2008. He also serves as Chief Development Officer of Equinix and leads its strategy, business development and network technology development. Prior to joining Equinix, Schwartz served as Vice President, IP Communications at BellSouth. Schwartz also used to be a member of McKinsey & Co., where he consulted with telecommunications and financial services companies in the U.S. and Asia on strategic issues. Schwartz holds a BS in Electrical Engineering and BA in Economics from Stanford University and an MBA from Harvard University.
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Company Models
Figure 7: Equinix Quarterly Operating Forecast
$ in millions, except per share data
1Q07 Revenue Recurring Revenue Non-Recurring Total Revenue Operating Expenses Cash Cost of Revenue Cash Sales and Marketing Cash General and Administrative Equity-Based Compensation Depreciation and amortization Total Operating Expenses Gross Profit margin Adjutsed EBITDA margin Operating Income margin Interest income & other Interest expense Other Pretax Income Income taxes Tax rate Net Income Average shares outstanding - Basic Average shares outstanding - Diluted Earnings Per Share - Basic Earnings Per Share - Diluted 2Q07 3Q07 4Q07 2007 1Q08 2Q08 3Q08 4Q08E 2008E 1Q09E 2Q09E 3Q09E 4Q09E 2009E 2010E
31.9 6.2 14.6 10.5 21.1 84.3 53.2 62.5% 32.4 38.0% 0.8 0.9% 1.9 (3.6) 0.1 (0.7) (0.4) 50.1% (1.1) 29.7 29.7 ($0.04) ($0.04)
33.7 7.1 15.7 10.0 22.4 89.0 58.1 63.3% 35.3 38.4% 2.9 3.1% 5.1 (6.1) 0.0 1.8 (0.2) -10.8% 1.6 31.1 32.7 $0.05 $0.05
40.2 7.3 15.6 10.5 24.1 97.7 63.5 61.2% 40.6 39.2% 6.1 5.9% 0.8 (5.7) 3.2 4.3 (0.2) -5.0% 4.1 31.7 33.1 $0.13 $0.12
59.5 9.1 23.1 11.7 35.9 139.3 79.2 57.1% 47.1 33.9% (0.6) -0.4% 5.1 (12.1) (0.1) (7.7) 0.3 -3.8% (7.4) 36.0 36.0 ($0.21) ($0.21)
165.4 29.7 69.0 42.7 103.5 410.3 254.0 60.6% 155.4 37.0% 9.2 2.2% 12.9 (27.5) 3.2 (2.3) (0.5) 21.0% (2.7) 32.1 32.9 ($0.08) ($0.08)
61.8 11.5 22.7 12.3 35.9 144.2 96.5 61.0% 62.3 39.4% 14.0 8.9% 3.4 (13.6) 2.0 5.9 (0.5) -8.0% 5.4 36.3 37.3 $0.15 $0.15
66.1 10.9 25.9 17.0 38.8 158.7 106.0 61.6% 69.1 40.2% 13.3 7.7% 2.4 (12.8) (0.9) 2.0 0.3 13.1% 2.2 36.6 37.8 $0.06 $0.06
70.6 12.1 24.1 12.6 42.1 161.4 113.1 61.6% 77.0 41.9% 22.3 12.2% 0.4 (13.9) (0.5) 8.4 (0.2) -2.2% 8.2 37.0 37.9 $0.22 $0.22
72.5 11.8 25.6 15.2 43.5 168.5 117.4 61.8% 80.0 42.1% 21.4 11.3% 0.5 (14.3) 2.0 9.5 0.3 3.0% 9.8 37.2 38.2 $0.26 $0.26
270.9 46.3 98.3 57.1 160.3 632.9 432.9 61.5% 288.4 41.0% 71.0 10.1% 6.8 (54.6) 2.6 25.8 (0.1) -0.4% 25.6 36.7 37.8 $0.70 $0.68
76.2 12.4 27.5 15.9 45.2 177.1 123.8 61.9% 83.9 42.0% 22.8 11.4% 0.7 (14.3) 0.8 9.9 0.3 3.0% 10.2 37.4 38.4 $0.27 $0.27
80.3 13.1 28.9 16.8 47.6 186.6 132.3 62.2% 90.3 42.5% 25.9 12.2% 0.9 (14.1) 0.8 13.5 0.4 3.0% 13.9 38.4 39.4 $0.36 $0.35
83.3 13.6 30.0 17.4 49.4 193.7 139.6 62.6% 96.0 43.1% 29.2 13.1% 1.1 (14.1) 0.8 16.9 0.5 3.0% 17.4 38.6 39.6 $0.45 $0.44
88.5 14.4 31.9 18.5 52.5 205.9 146.5 62.3% 100.2 42.6% 29.1 12.4% 1.1 (14.0) 0.8 17.1 0.5 3.0% 17.6 38.8 39.8 $0.45 $0.44
328.2 53.4 118.3 68.7 194.6 763.3 542.1 62.3% 370.4 42.6% 107.1 12.3% 3.8 (56.5) 3.0 57.4 1.7 3.0% 59.2 38.3 39.3 $1.54 $1.51
388.1 60.7 138.3 80.3 224.9 892.3 661.6 63.0% 462.6 44.1% 157.5 15.0% 2.2 (54.1) 3.0 108.5 3.3 3.0% 111.8 39.6 40.6 $2.82 $2.75
24
14.7% 3.5%
15.5% 2.8%
44.0% 31.9%
45.8% 3.9%
45.8%
49.4% 6.0%
52.2% 4.8%
23.0% 6.6%
26.7% 7.0%
26.7%
26.7% 6.0%
27.0% 5.0%
27.0% 4.5%
24.5% 4.3%
24.5%
19.5%
18.8% 4.7%
20.1% 6.2%
19.3% 4.7%
22.5% 5.2%
22.5%
25.5% 7.2%
24.6% 5.4%
24.4% 4.6%
26.7% 7.1%
26.7%
27.1% 7.5%
28.4% 6.5%
29.8% 5.8%
27.7% 5.4%
27.7%
22.4% 3.1%
25,100 1,100
24,900 (200)
25,800 900
30,100 4,300
30,100 6,100
30,300 200
33,800 500
34,450 650
34,450 4,350
34,750 300
36,350 1,600
37,750 1,400
38,750 1,000
38,750 4,300
42,250 3,500
18,400 1,000
19,200 800
20,500 1,300
22,000 1,500
22,000 4,600
23,500 1,500
26,400 1,300
26,827 427
26,827 4,827
27,058 231
27,708 650
28,990 1,282
30,138 1,148
30,138 3,311
32,833 2,695
26.4%
21.9%
12.3%
19,700 19,650
24,413 25,132
28,482 28,173
73% 73%
77% 76%
79% 78%
73% 71%
73% 65%
78% 77%
76% 74%
77% 77%
77%
77%
75%
76%
77%
77%
68.3% 17.9% 8.5% 0.6% 95.4% 5.5% 100.0% $1,498 $1,724 22.0% 15.5%
71.5% 19.2% 4.7% 0.4% 95.7% 4.3% 100.0% $1,532 $1,550 7.5% -10.1%
74.2% 17.5% 3.6% 0.2% 95.5% 4.5% 100.0% $1,603 $1,604 -6.9% 1.5%
75.5% 17.0% 3.2% 0.1% 95.8% 4.2% 100.0% $1,650 $1,659 7.0% 3.4%
75.2% 16.6% 2.9% 0.1% 94.8% 5.2% 100.0% $1,654 $1,652 5.6% -0.4%
$1,765 7.2%
25
0.8 (0.2) 27.3 (7.4) 19.9 67.1 (47.2) 0.0 (47.2) 273.6 0.0 0.0 19.0 (0.4) 245.0 0.1 245.1
0.8 0.2 34.7 3.1 37.9 139.8 (102.0) 0.0 (102.0) 43.6 0.0 0.0 (42.1) 6.9 (93.5) 0.4 (93.1)
0.8 (2.3) 37.2 11.2 48.4 88.9 (40.5) 0.0 (40.5) 444.4 339.9 (541.7) (90.6) (1.1) 110.4 (1.6) 108.9
0.8 (1.2) 41.3 (27.5) 13.9 121.0 (107.1) 0.0 (107.1) 29.3 (0.0) (0.1) 17.5 8.7 (51.6) (1.2) (52.8)
3.1 (3.4) 140.6 (20.5) 120.0 416.8 (296.8) 0.0 (296.8) 791.0 339.9 (541.8) (96.1) 14.1 210.3 (2.2) 208.1
0.4 0.5 55.5 7.5 63.0 125.6 (62.7) 0.0 (62.7) 37.8 0.0 (23.2) 12.7 6.8 (28.6) (1.2) (29.8)
0.4 (1.2) 58.0 7.0 65.0 84.5 (19.5) 0.0 (19.5) 30.4 0.0 0.0 (131.8) 11.6 (109.3) (0.4) (109.7)
0.4 1.8 65.0 (1.6) 63.3 95.4 (32.1) 0.0 (32.1) 19.6 0.0 0.0 13.0 6.8 7.3 2.2 9.6
0.4 0.0 70.5 (5.0) 65.5 151.5 (86.0) 0.0 (86.0) 36.0 0.0 0.0 0.0 12.0 (38.0) (0.5) (38.5)
1.6 1.1 248.9 7.8 256.8 457.0 (449.2) 0.0 (449.2) 123.8 0.0 (23.2) (106.1) 37.2 (417.6) 0.2 (417.4)
0.4 0.0 73.4 (5.0) 68.4 51.0 17.4 0.0 17.4 0.0 0.0 0.0 0.0 8.0 25.4 (0.5) 24.9
0.4 0.0 80.5 (5.0) 75.5 135.0 (59.5) 0.0 (59.5) (32.3) 0.0 0.0 0.0 8.0 (83.8) (0.0) (83.8)
0.4 0.0 86.5 (5.0) 81.5 113.0 (31.5) 0.0 (31.5) 0.0 0.0 0.0 0.0 8.0 (23.5) (0.0) (23.5)
0.4 0.0 90.9 (5.0) 85.9 75.0 10.9 0.0 10.9 (18.7) 0.0 0.0 0.0 8.0 0.2 (0.0) 0.2
1.4 0.0 331.3 (20.0) 311.3 374.0 (62.7) 0.0 (62.7) (51.0) 0.0 0.0 0.0 32.0 (81.7) (0.5) (82.2)
1.0 0.0 426.2 (30.0) 396.2 325.5 70.7 0.0 70.7 (50.0) 0.0 0.0 0.0 30.0 50.7 (2.0) 48.7
26
9/30/08 Assets Current assets Cash and cash equivalents Short-term Investments Accounts receivable - net Prepaid expenses & other current assets Total current assets Long-term investments Property and equipment, net Goodwill Debt issuance costs, net Other assets Total assets
12/31/07
9/30/07
$291 93 60 0 444
$343 64 49 26 483
18 105 2,292
21 44 2,145
22 27 2,131
Liabilities and shareholders' equity Current liabilities Accounts payable and accrued expenses Accrued PP&E Current portion of accrued restructuring charges Current portion of debt, credit facilities and CLO Current portion of mortgage payable Other current liabilities Total current liabilities
71 57 0 4 41 66 239
65 77 12 1 11 36 202
94 60 14 4 3 22 198
Accrued restructuring charges, less current portion Debt facilities and CLO, less current portion Mortgage payable Convertible subordinated debt and secured notes Deferred rent and other Total liabilities Shareholders' equity Preferred stock Common stock Additional paid-in capital Deferred stock-based compensation Accumulated other comprehensive income Accumulated deficit Total shareholders' equity Total liabilities and shareholders' equity
Source: Company reports.
27
Recurring revenue model with solid visibility. Slightly more than 94% of Switch and Datas revenue is recurring, generated from customers opting for 1-3 year contracts. Interconnect contracts can run month-to-month, though most customers tend to use the service for long periods of time. Recurring revenue growth in 3Q08 exceeded 24%. Notably, approximately 85% of the companys $207M-$210M revenue plan for 2009 is under contract, providing good visibility into the new year. The Network Effect. Many of the worlds largest bandwidth providers invest to access Switch and Data facilities, creating an attractive environment for content provider, service providers, and other network providers. The large number of prominent customers located in their facilities entices other companies and enterprises to locate and connect in Switch and Data facilities, creating an ecosystem or network of companies. These customers leverage Switch and Datas interconnection capabilities to reduce traffic transit costs and latency while providing a price competitive environment for network connectivity. As of 3Q08, interconnection accounted for 31% of total revenue at Switch and Data compared with 13% at Equinix. Customer loyalty. Switch and Datas customer loyalty is critical to the companys success. Historically, anywhere from 75% to 90% of incremental sales in a given quarter are generated from existing customers, reflecting a willingness on the part of customers to want to grow with the company as well as Switch and Datas ability to meet customer needs in multiple locations. Churn on monthly recurring revenue in the most recent quarter was 1.1%, nearly half that of Equinix. Liquidity limits growth opportunity. Though Switch and Data currently has nearly $43M of cash, we anticipate cash burn of $35M in 4Q08. While we believe the company has meaningful growth opportunities, it is limited by its spending capacity, particularly in such a challenging credit environment. We believe the company will need to draw down its delayed term loan of $22.5M in order to maintain a positive cash balance in 2009. As a result, the company will likely be unable to accelerate expansion without tapping the credit markets, though we believe financing options may be limited.
Investment Risks
Economic weakness. Given the companys exposure to the overall enterprise market, the company faces risks of a slowdown in technology spending as the economy struggles to find its foothold. Lengthening of sales cycle and delays in decision making could slow anticipated growth in particular. Increased competition. Though Switch and Data is one of a few major players in the carrier neutral colocation market, there is no shortage of service providers investing in data centers. Network providers such as AT&T, Cogent, Savvis, and Verizon are all investing in new data center capacity and leveraging their network capabilities and managed/professional services offerings to compete for customers.
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Increased supply could pressure pricing for Switch and Data services, which has been a driver of growth in recent quarters. Data center expansion. We believe Switch and Datas growth may be limited by the available funding to support new data center builds. Should the company build centers at a more aggressive pace than we are modeling, revenue growth and profitability could drive multiple expansion. Operating leverage. An acceleration of IP traffic growth or continued price leverage could drive higher-than-expected revenue growth. With a largely fixed cost structure, EBITDA and margins could improve beyond our long term forecast.
Company Description
Switch and Data provides colocation and network neutral interconnection services to telecommunications carriers, Internet service providers, online content providers, and enterprises. Through the colocation business, which consists of 34 data center facilities, Switch and Data provides space along with power for customers to house their networking and computing equipment. In addition to space and power, the company aims to provide other complementary services such as physical security, fire protection, and other technical and maintenance services. Utilizing these collocation facilities, Switch and Data helps customers manage network traffic through direct interconnection and multiple-party interconnection services. The company generated $138 million in revenues in 2007, with the colocation business accounting for approximately 62% of revenue, the interconnection portion approximately 32%, with the balance coming from installation and other nonrecurring revenue. Switch and Data is headquartered in Tampa, Florida. Its stock trades on the NASDAQ under the ticker SDXC. Largest number of carrier-neutral data centers in the U.S. Switch and Data operates 34 data centers across 23 markets located predominantly throughout the U.S. The companys only non-U.S. facility, located in Toronto, accounts for less than 7% of total revenue. As of 3Q08, the company supported approximately 970K square feet of data space, though not all of the space is made available to clients. Square footage in each market ranges from 6.8K to nearly 253K. Switch and Datas facilities are not owned by the company, but are typically leased for a period of fifteen years, many with renewal options. Focus on Top 10 Markets. Switch and Data has a presence in 14 of the 15 largest metropolitan markets, focusing on areas where aggregate Internet traffic is the highest. The New York metro area is the companys largest, with four facilities and gross square footage of nearly 253K. Other top markets include Atlanta, Chicago, Dallas, Los Angeles, Philadelphia, San Francisco, Seattle, Toronto, and Virginia Though more geographically diverse than its domestic peers, Switch and Data is reliant upon its top markets for the majority of its revenue. Revenue in the top markets accounts for roughly 85% of the companys total revenue and achieves topline growth nearly double that of its other markets (26% versus 14% in 3Q08). Additionally, site cash flow (site revenue less site expenses) in the top 10 markets rose 21% from a year ago, 200 bps higher than growth in the remaining markets.
29
Source: Company reports and J.P. Morgan estimates. Note: data center count includes the new lease in Atlanta for which service will begin in 2010.
Broader Coverage Supports Customer Needs. In addition to the top markets, the company supports 13 additional centers in 10 states, accounting for roughly 22% of the companys total gross square footage. Though less strategic in nature than the top markets, these smaller centers provide valuable facilities to meet the needs of existing customers in need of capacity in less dense markets. As of year end 2007, 72 of the companys top 100 customers utilized services in more than one market. Notably, sales to existing customers accounted for 75% of total incremental sales in 3Q08, and have been as high as 89% as recently as 1Q08, reflecting Switch and Datas service quality and customer loyalty. Asset Base Built With Help of Acquisitions. Since early 2003, Switch and Data acquired several companies, which accounted for 12 of their current data center facilities. Notable acquisitions include the March 2003 purchase of PAIX, a part of Metromedia Fiber Networks, which sold the asset under bankruptcy protection for $40M; the transaction brought six facilities located in Atlanta, Dallas, New York, Palo Alto, Seattle, and Vienna (VA). Other key acquisitions were Meridian Telesis, Remote Access Company (RACO), and LayerOne.
Table 14: Acquisition History
Date January 2005 March 2004 January 2004 March 2003 Price $26.0M $14.5M $4.8M $42.4M Target LayerOne RACO Meridian Telesis PAIX Locations Chicago, Dallas, Miami Buffalo, Chicago, New York, Toronto Philadelphia Atlanta, Dallas, New York, Palo Alto, Seattle, Vienna (VA)
Expanding Organically. Following the most recent acquisition in early 2005, Switch and Data has focused on growing the company organically. In 2006, the company increased its billed cabinet equivalents by 15%, expanding or adding capacity in Chicago, Denver, Palo Alto, and New York. Billable cabinets increased nearly 17% in 2007 and are on pace for roughly 14% growth in 2008. Expansions in 2008 include additional capacity in the Dallas and Toronto facilities as well as new capacity in Sunnyvale and phase 1 of the 163K square foot New Jersey facility, which opened in October 2008. Combined, the expansion in these four markets
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accounted for more than 50% of new sales in the third quarter. With roughly 3.3K sellable cabinets coming online in 2008 and an additional 1.0K in announced expansions planned in 2009, total sellable cabinets will be up an estimated 44% during the two year period. In September 2008, the company secured a lease for a second facility in Atlanta. The lease provides for more than 79K square feet of capacity, with service expected to begin in late 2010. Revenue Reflects Focus on Interconnection. Approximately 94% of Switch and Datas revenue was recurring in 3Q08, on par with that of Equinix. However, the breakdown of recurring revenue differs significantly between the two companies, With Switch and Data receiving a greater percentage of interconnection revenue than its peer. Of the recurring revenue, nearly one-third came from cross connect services with colocation accounting for the remainder. This contrasts with only a 13% contribution of interconnect at Equinix. The results likely reflect a greater emphasis on interconnection at Switch and Data as total cross connects are nearly equal at the two firms, though Switch and Data has fewer than half as many customers and roughly one-third the number of cabinets.
Figure 11: Switch and Data Revenue Breakdown
Recurring 94%
Interconnection 31%
ARPU Growing near Double-Digits. As with Equinix, pricing remains a key driver of revenue growth for the firm. We estimate recurring revenue per average billed cabinet rose 10% from a year ago, the sixth consecutive quarter of accelerating growth. The improvement is largely driven by two factors. First, the company is benefiting from annual price increases of roughly 3.5% and expects pricing in 2009 to also increase by 3.0%-3.5%. Second, the need for incremental services, including more cross connects and power, are driving larger deal sizes. As customer demand for power increases, the company is delivering more power per square foot and its prices increase accordingly. We expect ARPU to remain in the high single-digit to low double-digit range for the near-term.
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$1,750
6.0%
$1,550 1Q07 2Q07 3Q07 ARPU 4Q07 y /y change 1Q08 2Q08 3Q08
0.0%
Operating Leverage Supports Hefty Margin Expansion. Cash EBITDA margins in the third quarter were 31.7%, up 20 bps from the prior year, but down 210 bps sequentially due to seasonally higher utility costs and expenses incurred prior to the opening of the New Jersey facility. However, incremental margins run higher as the company benefits from increased utilization while operating costs are largely fixed. Based on management guidance, incremental EBITDA margins are expected to exceed 43% in 2009, helping elevate margins nearly 200 bps, to 34.5%. In 3Q07, management issued long-term guidance, anticipating 3-year compounded EBITDA growth of 35% and 24% revenue growth. Further, we believe management is targeting 40% EBITDA margins, likely in the 2011 timeframe. Though likely to be lower than that of Equinix, we forecast 5-year compounded EBITDA growth (2009 to 2014) of nearly 21% at Switch and Data versus 16% for Equinix.
Figure 13: Switch and Data Margin Trends
275 40.0%
125
20.0%
(25) 2006 2007 Rev enue 2008E EBITDA 2009E EBITDA margin 2010E
0.0%
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Capital Spending Likely to Drop Significantly in 2009. Approximately 90% of Switch and Datas capital expenditures are expansion driven, with the remaining 10% used for maintenance and on-going capital needs. As a result of the heavy expansion in recent years, capital spending has increased from more than $21M in 2006 to a guided $165M in 2008. With only $40M of incremental New Jersey spend, capital spending is expected to drop 60% in 2009, to $65M. Included in the spending plans is approximately $10M for on-going expenditures and up to $15M for capacity fill-ins in existing markets. Beyond that, the company recently entered into a 15-year lease agreement for a 79K square foot facility in Atlanta. The company does not anticipate capacity coming online in this facility until late 2010 and indicated that capital spending in 2009 for Atlanta would be minimal. As a result, we believe 2010 capital requirements should be relatively comparable with 2009.
Figure 14: Switch and Data Capital Spending Trends
$ in millions
$180 $160 $140 $120 $100 $80 $60 $40 $20 $0 2006 2007 2008E 2009E 2010E 450.0% 400.0% 350.0% 300.0% 250.0% 200.0% 150.0% 100.0% 50.0% 0.0% -50.0% -100.0%
US & Asia-Pacific
y /y change
Fully Funded, With Help from Undrawn Facilities. In March 2008, the company restructured its debt profile through an amended and restated credit agreement. Under the agreement, the company received a $120M term loan, which was partially used to repay $38.2M outstanding under a prior credit agreement. In addition, the company has access to a $22.5M delayed draw term loan through March 2009 and a $15M revolver. Management recently indicated that it plans to draw down the delayed term loan either in 4Q08 or 1Q09. Based on current LIBOR rates, interest should be less than $2M per year while principal repayment on both its $120M term loan and the undrawn facility are not expected to begin until 2010. We believe drawing on the facility will provide a comfortable cash cushion to meet the companys needs in 2009. Our estimates could prove conservative should management succeed in improving utilization rates more quickly than anticipated. Current utilization is approximately 63% and management expects this to stay relatively stable as customer growth is offset by increased capacity in New Jersey. Should customer demand support utilization rates of 70% or more (on par with pre-expansion levels), we believe the investments will drive meaningful cash generation, particularly given the attractive operating leverage of the business and relatively low level of maintenance spend required.
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S-3 Filing Could Provide Additional Liquidity, Increase Float. In July, Switch and Data filed an S-3, proposing to raise up to $300M in debt and/or equity. The proceeds would be used to repay existing debt as well as for general purposes, including capital expenditures. We would view the fundraising positively as it should enable Switch and Data to grow more rapidly beyond its current 2009 expansion plans. However, we believe the current credit environment may limit the attractiveness of any debt component, increasing the likelihood that equity may be raised, which would likely dilute the existing share base. The filing also enables two private equity holders, representing approximately 36% of the companys outstanding stock, to sell their shares. Additional float could also allow broader ownership of Switch and Data shares.
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Management
Table 15: Switch and Data Management Team
Key Executives Keith Olsen George A. Pollock Jr. Charles D. Browning Ali Marashi Clayton Mynard William Roach Ernest Sampera
Source: Company data.
Age 51 40 60 38 43 62 47
Position at Switch and Data President & CEO Sr. VP & CFO VP of Operations Chief Information Officer VP, General Counsel & Secretary Sr. VP of Sales Sr. VP & Chief Marketing Officer
Previous Experience AT&T, Graphnet, Inc Communications Equity Associates, Inc, Deloitte & Touche UNISYS, NYNEX, and TCSI Corporation Internap, interGlobe Networks Comm Equity Assoc., LLC., Tech Data Corp., Anchor Glass Container Corp. SonicWall, Inc,PCTEL, Maxtor Corporation, and Quantum Corporation, Intel AT&T, IBM, UNISYS, and the American Medical Association
Keith Olsen, President and CEO Keith Olsen has been President and CEO of Switch and Data since February 2004. He has worked in the telecommunications and IT industries for more than 26 years. Prior to joining Switch and Data, Keith served as Vice President of Indirect Sales and Global Channel Management at AT&T, where he developed new markets and sales channels. Mr. Olsen holds a bachelors degree from the State University of New York, Geneseo. George A. Pollock, Jr., Senior Vice President & Chief Financial Officer George Pollock joined Switch and Data in 1999. He is responsible for all finance functions at Switch and Data including billing, accounting, and business planning. He has over 16 years of finance experience, including his last position as Chief Financial Officer of the Merchant Banking Division of Communications Equity Associates, Inc. (CEA). George is a Certified Public Accountant and belongs to the AICPA (American Institute of Certified Public Accountants) and the FICPA (Florida Institute of Certified Public Accountants. Mr. Pollock holds a bachelors degree and a masters degree in accounting from the University of Florida. Charles D. Browning, Vice President of Operations Charles Browning has been with Switch and Data since March of 2000. He oversees operations and site management for Switch and Datas colocation and PAIX data centers located throughout North America. Prior to joining Switch and Data, Charles held executive telecom positions with UNISYS, NYNEX, and TCSI Corporation. Mr. Browning holds a bachelors degree from the State University of New York.
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Ali Marashi, Chief Information Officer Ali Marashi joined Switch and Data in 2005 to direct the IT and engineering organizations. Prior to joining Switch and Data, Ali served as Internap's Chief Technology Officer. From 1997 to 2000, Ali was Lead Network Engineer for Networks and Distributed Computing at the University of Washington. From 1995 to 1997 Ali was a co-founder and Vice President of Engineering for interGlobe Networks, Inc., a TCP/IP consulting firm. Clayton Mynard, Vice President, General Counsel & Secretary Clayton Mynard has been Vice President, General Counsel and Secretary of Switch & Data Facilities Co., Inc. since June 2003. Mynard was at private law firm Allen Dell, P.A. from February 2003 to June 2003. From October 2000 to April 2002, Mr. Mynard served as Vice President of Business Affairs and General Counsel to Communications Equity Associates (CEA). Mr. Mynard holds a J.D. from the University of Florida and a Bachelor's degree from Florida State University. William Roach, Senior Vice President of Sales William F. Roach (Bill) has been Senior Vice President of Sales at Switch & Data Facilities Co., Inc. since November 2003. Roach has over 26 years of experience in information technology, Internet and communications industries. He served as Vice President of Business Development of SonicWALL Inc., and prior to that was at PCTEL Corporation where he served as Chief Operating Officer and Chief Executive Officer. Mr. Roach received his Bachelor of Science degree from Purdue University. Ernest Sampera, Senior Vice President & Chief Marketing Officer Ernest Sampera has been Senior Vice President of Marketing of Switch & Data since August 2004 and is currently its Chief Marketing Officer. Mr. Sampera has 20 years of experience in marketing and sales. Prior to joining Switch and Data, Mr. Sampera served as Vice President of Channel Marketing of AT&T Business Services. Mr. Sampera holds a bachelor's degree in Finance from the University of Akron.
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Capital Intensity. Increasing data center supply is a capital intensive business. Should demand fail to materialize to support ample utilization of newly added data centers, Switch and Datas growth could be lower than anticipated.
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Company Models
Figure 15: Switch and Data Quarterly Operating Forecast
$ in millions, except per share data
1Q07 Revenue Colocation Interconnection Recurring revenue Non-recurring revenue Total Revenue Operating Expenses Cost of revenue Sales and Marketing General and Administrative Depreciation and amortization Equity-Based Compensation (included in above) Total Operating Expenses Gross Profit margin Adjusted EBITDA margin Operating Income margin Interest income & other Interest expense Other Pretax Income Income taxes Tax rate Net Income from Cont. Operations
Income (loss) from Discont. Operations
2Q07
3Q07
4Q07
2007
1Q08
2Q08
3Q08
4Q08E
2008E
1Q09E
2Q09E
3Q09E
4Q09E
2009E
2010E
16.0 3.8 3.5 6.2 0.9 29.5 15.4 49.0% 8.9 28.5% 1.9 5.9% 0.2 (2.6) (0.1) (0.6) 0.3 -47.5% (0.9) 0.2 (0.8) 64.9 64.9 ($0.01) ($0.01)
16.8 4.0 3.6 6.0 1.1 30.6 16.4 49.3% 9.8 29.4% 2.7 8.0% 0.5 (0.6) (0.0) 2.5 (0.1) -4.4% 2.7 0.1 2.8 33.9 0.2 34.1 $0.08 $0.08
17.9 3.8 3.6 6.4 1.1 31.8 17.5 49.4% 11.2 31.5% 3.7 10.4% 0.5 (1.7) (0.2) 2.3 0.5 19.4% 1.9 0.1 2.0 33.9 0.9 34.8 $0.06 $0.06
17.7 4.6 3.6 7.0 1.0 32.8 19.8 52.9% 12.7 33.8% 4.7 12.4% 0.6 (1.7) (0.0) 3.5 0.5 13.5% 3.0 0.0 3.0 34.2 0.6 34.9 $0.09 $0.09
68.4 16.3 14.4 25.6 4.1 124.7 69.1 50.2% 42.5 30.9% 12.8 9.3% 1.8 (6.6) (0.3) 7.7 1.1 14.4% 6.6 0.4 7.0 41.6 0.0 41.6 $0.17 $0.17
19.2 5.2 4.3 6.5 1.5 35.2 20.6 51.7% 12.6 31.7% 4.6 11.4% 0.4 (2.5) (0.2) 2.3 0.5 21.8% 1.8 0 1.8 34.3 0.6 34.9 $0.05 $0.05
20.2 4.9 4.3 6.7 1.7 36.1 21.7 51.7% 14.2 33.8% 5.8 13.7% 0.7 (2.7) (0.2) 3.6 1.6 44.0% 2.0 0 2.0 34.5 0.6 35.1 $0.06 $0.06
22.6 4.6 4.4 7.5 1.5 39.1 21.5 48.7% 14.0 31.7% 4.9 11.2% 0.4 (3.7) (0.3) 1.4 0.7 49.9% 0.7 0 0.7 34.7 0.0 34.5 $0.02 $0.02
22.2 5.2 4.6 7.3 1.7 39.2 22.9 50.8% 14.8 32.9% 5.9 13.0% 0.5 (4.1) (0.2) 2.1 0.8 38.0% 1.3 0 1.3 34.7 0.6 35.3 $0.04 $0.04
84.2 19.9 17.6 28.0 6.4 149.8 86.7 50.7% 55.5 32.5% 21.1 12.4% 2.0 (13.0) (0.8) 9.3 3.5 38.1% 5.8 0.0 5.8 34.5 0.4 35.0 $0.17 $0.16
23.3 5.4 4.9 7.2 1.7 40.9 24.5 51.2% 15.8 33.1% 6.9 14.5% 0.5 (4.2) (0.2) 3.1 1.2 38.0% 1.9 0 1.9 34.9 0.6 35.5 $0.05 $0.05
23.6 5.7 5.2 8.5 1.7 43.0 27.1 53.4% 17.9 35.3% 7.7 15.2% 0.5 (4.2) (0.2) 3.9 1.5 38.0% 2.4 0 2.4 35.1 0.6 35.7 $0.07 $0.07
24.8 6.0 5.4 8.9 1.7 45.2 28.6 53.5% 18.9 35.3% 8.3 15.5% 0.5 (4.2) (0.2) 4.4 1.7 38.0% 2.8 0 2.8 35.3 0.6 35.9 $0.08 $0.08
25.1 6.1 5.5 9.0 1.7 45.5 29.4 54.0% 19.5 35.9% 8.9 16.3% 0.5 (4.2) (0.2) 5.0 1.9 38.0% 3.1 0 3.1 35.5 0.6 36.1 $0.09 $0.09
96.9 23.2 21.0 33.5 6.8 174.6 109.5 53.1% 72.1 34.9% 31.8 15.4% 2.0 (16.7) (0.7) 16.4 6.2 38.0% 10.2 0.0 10.2 35.2 0.6 35.8 $0.29 $0.28
106.4 25.7 23.2 38.1 7.0 193.5 123.9 53.8% 82.0 35.6% 36.9 16.0% 2.0 (16.0) (1.0) 21.9 8.3 38.0% 13.6 0 13.6 36.0 0.6 36.6 $0.38 $0.37
Net Income Average shares outstanding - Basic + Dilutive securities Average shares outstanding - Diluted Earnings Per Share - Basic Earnings Per Share - Diluted
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821 27 16,991 389 16,797 5,393 266 5,260 8,427 539 64.0%
832 11 17,417 426 17,204 5,526 133 5,460 8,634 208 64.0%
851 19 17,755 338 17,586 5,843 317 5,685 8,813 179 66.3%
851 66 17,755 1,350 17,080 5,843 768 5,459 8,813 1,124 66.3%
857 6 18,194 439 17,975 5,987 144 5,915 8,989 177 66.6%
871 14 18,775 581 18,485 6,184 197 6,086 8,911 (79) 69.4%
883 12 19,124 349 18,950 6,636 452 6,410 9,480 569 70.0%
899 16 19,577 453 19,351 6,833 197 6,735 9,678 198 70.6%
899 48 19,577 1,822 18,666 6,833 990 6,338 9,678 865 70.6%
907 8 19,797 220 19,687 7,034 201 6,934 10,006 327 70.3%
915 8 20,419 622 20,108 7,117 83 7,076 10,949 944 806,000 65.0%
935 20 20,879 460 20,649 7,347 230 7,232 11,680 731 970,000 62.9%
973 38 21,993 1,114 21,436 7,649 302 7,498 11,767 818 65.0%
973 74 21,993 2,416 20,785 7,649 816 7,241 11,767 2,820 65.0%
987 14 22,495 503 22,244 7,844 195 7,746 12,067 300 65.0%
999 12 22,976 480 22,736 7,992 148 7,918 12,295 227 65.0%
1006 7 23,548 572 23,262 8,151 160 8,071 12,540 245 65.0%
1006 (0) 23,740 192 23,644 8,299 148 8,225 12,767 227 65.0%
1,006 33 23,740 1,747 22,866 8,299 650 7,974 12,767 1,000 65.0%
1039 33 24,932 1,193 24,336 8,570 272 8,435 12,986 218 66.0%
1.1%
3.4%
1.3%
2.3%
5.6%
8.2%
3.4%
10.3%
12.3%
7.9%
1.2%
2.3%
2.5%
1.9%
16.9%
11.9%
8.5%
1.0%
5.2%
2.5%
5.7%
20.9 6.5
20.7 6.6
20.9 6.6
20.9 6.9
20.9 6.9
21.2 7.0
21.6 7.1
21.7 7.5
21.8 7.6
21.8 7.6
21.8 7.8
22.3 7.8
22.3 7.9
22.6 7.9
22.6 7.9
22.8 8.0
23.0 8.0
23.4 8.1
23.6 8.3
23.6 8.3
24.0 8.3
58.0% 38.0% 96.1% 3.9% $1,009 -1.1% 60.4% $204 0.7% 39.6% $1,670 -0.3%
57.8% 38.1% 95.9% 4.1% $1,001 -0.8% 60.3% $207 1.1% 39.7% $1,661 -0.6%
58.7% 36.6% 95.3% 4.7% $1,011 1.0% 61.6% $200 -3.3% 38.4% $1,641 -1.2%
59.3% 35.8% 95.1% 4.9% $1,011 0.0% 62.3% $197 -1.3% 37.7% $1,622 -1.1%
60.1% 34.7% 94.8% 5.2% $1,062 5.3% 5.1% 63.4% $202 -1.1% 2.4% 36.6% $1,677 0.4% 3.4%
61.1% 33.6% 94.7% 5.3% $1,111 11.1% 4.6% 64.5% $201 -2.5% -0.4% 35.5% $1,723 3.8% 2.8%
62.2% 32.4% 94.6% 5.4% $1,145 13.3% 3.0% 65.7% $202 1.1% 0.3% 34.3% $1,742 6.2% 1.1%
62.6% 31.6% 94.2% 5.8% $1,161 14.8% 1.4% 66.4% $204 3.5% 1.1% 33.6% $1,748 7.8% 0.3%
61.5% 33.0% 94.5% 5.5% $1,113 12.1% 65.1% $203 0.7% 34.9% $1,710 5.4%
63.6% 31.0% 94.6% 5.4% $1,216 14.5% 4.8% 67.2% $209 3.2% 2.2% 32.8% $1,809 7.9% 3.5%
62.6% 31.7% 94.4% 5.6% $1,236 11.2% 1.7% 66.4% $220 9.4% 5.6% 33.6% $1,862 8.1% 3.0%
63.4% 31.0% 94.4% 5.6% $1,288 12.5% 4.2% 67.2% $220 9.2% 0.1% 32.8% $1,917 10.0% 2.9%
63.6% 30.7% 94.2% 5.8% $1,275 9.8% -1.0% 67.5% $215 5.3% -2.4% 32.5% $1,890 8.1% -1.4%
63.3% 31.1% 94.4% 5.6% $1,245 11.9% 67.1% $213 5.0% 32.9% $1,856 8.6%
64.7% 30.0% 94.8% 5.2% $1,332 9.5% 4.5% 68.3% $213 2.0% -1.1% 31.7% $1,950 7.8% 3.2%
63.5% 31.4% 94.9% 5.1% $1,355 9.6% 1.7% 66.9% $233 5.9% 9.6% 33.1% $2,025 8.7% 3.8%
62.7% 32.4% 95.1% 4.9% $1,385 7.5% 2.2% 66.0% $248 12.5% 6.3% 34.0% $2,100 9.5% 3.7%
63.5% 31.7% 95.2% 4.8% $1,400 9.8% 1.1% 66.7% $244 13.2% -1.8% 33.3% $2,100 11.1% 0.0%
63.6% 31.4% 95.0% 5.0% $1,371 10.2% 66.9% $236 11.0% 33.1% $2,049 10.4%
66.2% 29.2% 95.4% 4.6% $1,507 9.9% 7.7% 69.4% $900 322.9% 269.6% 30.6% $2,172 6.0% 3.4%
61.2% $201
38.8% $1,623
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9/30/08 Assets Current assets Cash and cash equivalents Accounts receivable, net Prepaid and other assets Long-term assets Prepaid expenses & other current assets Total current assets Property and equipment, net Derivative asset Goodwill Other intangible assets, net Other long-term assets, net Total assets
12/31/07
Liabilities and shareholders' equity Current liabilities Accounts payable and accrued expenses Derivative liability Current portion of unearned revenue Current portion of deferred rent Current portion of customer security deposits Current portion of long-term debt Total current liabilities Derivative liability Unearned revenue, less current portion Deferred rent, less current portion Customer security deposits, less current portion Long-term debt, less current portion Long-term portion of capital lease obligation Total liabilities Shareholders' equity Series C Redeemable Preferred stock Series B Convertible Preferred stock Common stock Preferred stock Unearned stock-based compensation Additional paid-in capital Accumulated deficit Accumulated other comprehensive income Total shareholders' equity Total liabilities and shareholders' equity
Source: Company reports.
44 1 3 0 1 0 50 0 2 16 0 120 51 240
27 0 4 0 1 4 35 1 2 13 0 34 22 108
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Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analysts compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report.
Important Disclosures
Market Maker: JPMSI makes a market in the stock of Equinix, Switch and Data. Client of the Firm: Equinix is or was in the past 12 months a client of JPMSI. Switch and Data is or was in the past 12 months a client of JPMSI. Investment Banking (next 3 months): JPMSI or its affiliates expect to receive, or intend to seek, compensation for investment banking services in the next three months from Equinix. Gartner: All statements in this report attributable to Gartner represent J.P. Morgan's interpretation of data, research opinion or viewpoints published as part of a syndicated subscription service by Gartner, Inc., and have not been reviewed by Gartner. Each Gartner publication speaks as of its original publication date (and not as of the date of this report. The opinions expressed in Gartner publications are not representations of fact, and are subject to change without notice.
186 155 124 Price($) 93 62 31 0 Nov 05 Feb 06 May 06 Aug 06 Nov 06 Feb 07 May 07 Aug 07 Nov 07 Feb 08 May 08 Aug 08 Nov 08
Source: Reuters and J.P. Morgan; price data adjusted for stock splits and dividends. This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered it over the entire period. J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.
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36
27
Price($) 18
Source: Reuters and J.P. Morgan; price data adjusted for stock splits and dividends. This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered it over the entire period. J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.
Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analysts (or the analysts teams) coverage universe.] The analyst or analysts teams coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe.
Coverage Universe: Mike McCormack, CFA: AT&T Inc. (T), CenturyTel, Inc. (CTL), Cincinnati Bell, Inc. (CBB), Clearwire (CLWR), Cogent Communications (CCOI), Embarq Corp (EQ), Frontier Communications Corp (FTR), Leap Wireless International (LEAP), Level 3 Communications, Inc. (LVLT), MetroPCS (PCS), NTELOS Holdings Corp. (NTLS), Qwest Communications (Q), Sprint Nextel (S), Verizon Communications (VZ), Windstream Communications (WIN), tw telecom inc. (TWTC)
J.P. Morgan Equity Research Ratings Distribution, as of September 30, 2008 Overweight (buy) 42% 53% 40% 76% Neutral (hold) 44% 51% 48% 70% Underweight (sell) 15% 43% 12% 59%
JPM Global Equity Research Coverage IB clients* JPMSI Equity Research Coverage IB clients*
*Percentage of investment banking clients in each rating category. For purposes only of NASD/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category.
Valuation and Risks: Please see the most recent company-specific research report for an analysis of valuation methodology and risks on any securities recommended herein. Research is available at http://www.morganmarkets.com , or you can contact the analyst named on the front of this note or your J.P. Morgan representative. Analysts Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from, among other business units, Institutional Equities and Investment Banking.
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Investment research issued by JPMSL has been prepared in accordance with JPMSLs Policies for Managing Conflicts of Interest in Connection with Investment Research which outline the effective organisational and administrative arrangements set up within JPMSL for the prevention and avoidance of conflicts of interest with respect to research recommendations, including information barriers, and can be found at http://www.jpmorgan.com/pdfdoc/research/ConflictManagementPolicy.pdf. This report has been issued in the U.K. only to persons of a kind described in Article 19 (5), 38, 47 and 49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (all such persons being referred to as "relevant persons"). This document must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this document relates is only available to relevant persons and will be engaged in only with relevant persons. In other EEA countries, the report has been issued to persons regarded as professional investors (or equivalent) in their home jurisdiction Germany: This material is distributed in Germany by J.P. Morgan Securities Ltd. Frankfurt Branch and JPMorgan Chase Bank, N.A., Frankfurt Branch who are regulated by the Bundesanstalt fr Finanzdienstleistungsaufsicht. Australia: This material is issued and distributed by JPMSAL in Australia to wholesale clients only. JPMSAL does not issue or distribute this material to retail clients. The recipient of this material must not distribute it to any third party or outside Australia without the prior written consent of JPMSAL. For the purposes of this paragraph the terms wholesale client and retail client have the meanings given to them in section 761G of the Corporations Act 2001. 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In the case of share trading, JPMorgan Securities Japan Co., Ltd., will be receiving a brokerage fee and consumption tax (shouhizei) calculated by multiplying the executed price by the commission rate which was individually agreed between JPMorgan Securities Japan Co., Ltd., and the customer in advance. Financial Instruments Firms: JPMorgan Securities Japan Co., Ltd., Kanto Local Finance Bureau (kinsho) No. [82] Participating Association / Japan Securities Dealers Association, The Financial Futures Association of Japan. Korea: This report may have been edited or contributed to from time to time by affiliates of J.P. Morgan Securities (Far East) Ltd, Seoul branch. Singapore: JPMSI and/or its affiliates may have a holding in any of the securities discussed in this report; for securities where the holding is 1% or greater, the specific holding is disclosed in the Important Disclosures section above. India: For private circulation only, not for sale. 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this material to members of "the public" as determined in accordance with section 3 of the Securities Act 1978. The recipient of this material must not distribute it to any third party or outside New Zealand without the prior written consent of JPMSAL. General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to JPMSI and/or its affiliates and the analysts involvement with the issuer that is the subject of the research. All pricing is as of the close of market for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. JPMSI distributes in the U.S. research published by non-U.S. affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise. Other Disclosures last revised September 29, 2008.
Copyright 2008 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan.
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